MARKET WATCHEnergy prices climb as market tightens

Sam FletcherSenior Writer

HOUSTON, Dec. 30 -- Futures prices for crude and petroleum products continued to climb Dec. 29 as reports of low US inventories spurred fears of even tighter markets in 2006.

The US Energy Information Administration said Dec. 29 that US gasoline inventories tumbled by 1.2 million bbl to 202.9 million bbl during the week ended Dec. 22 (OGJ Online, Dec. 29, 2005). Commercial US stocks of crude increased by 100,000 bbl to 322.6 million bbl in the same period, while distillate fuels fell by 900,000 bbl to 126.8 million bbl, with a drop in heating oil overcoming a slight rise in diesel.

Market outlookUS gasoline stocks should be increasing during winter, not falling, but US demand is still firmly above 9.2 million b/d for the fourth consecutive week. "Inventories are now below their 5-year average, with the situation looking particularly tight on the East Coast," said Paul Horsnell of Barclays Capital Inc., London.

US demand for petroleum products was up from year-ago levels in December "by 0.8% for gasoline, 3.5% for jet [fuel], 6.3% for distillates, and 29.8% for residual fuel oil, with the monthly total among the main products set for an all-time high. With gasoline output now running 300,000 b/d below last year, and imports continuing to be needed to fill in the gap, the market balance looks precarious at a time of year when matters should look fairly flush," Horsnell said.

Some analysts expect US production of gasoline to be pinched more in 2006 because of a new low-sulfur requirements and the mandatory use of ethanol.

"What is certain is that this winter has been quite unpredictable as most forecasts called for a normal December, but the month came in well below normal," said Ronald J. Barone, managing director of equity research for the Natural Gas & Electric Utilities Group of UBS Securities LLC, New York.

Energy forecaster WSI Corp., Billerica, Mass., currently is calling for warmer-than-normal weather for most of the US in January, while AccuWeather Inc. forecasts the recent warming trend will dissipate into an extremely cold January. Many forecasters expect February to be colder than normal, especially in the Northeast.

Meanwhile, 410,618 b/d of crude and 1.95 bcfd of natural gas production are still shut-in in the Gulf of Mexico because of damage caused by Hurricanes Katrina and Rita in August and September. On Dec. 29, the US Minerals Management Service still listed as evacuated 103 production platforms in the federal sector of the gulf. Cumulative gulf production lost since Aug. 26 now totals 108.8 million bbl of crude and 560.8 bcf of natural gas. That's equivalent to 19.9% of the crude and 15.4% of the gas produced annually from federal leases in the gulf.

Energy pricesThe February contract for benchmark US light, sweet crudes gained 50¢ to $60.32/bbl Dec. 29 on the New York Mercantile Exchange, while the March position advanced by 56¢ to $60.92/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 50¢ to $60.32/bbl. Gasoline for January delivery jumped by 6.13¢ to $1.65/gal on NYMEX. Heating oil for the same month rose by 2.04¢ to $1.70/gal.

However, the new front-month February natural gas contract fell by 41.4¢ to $11.22/MMbtu on NYMEX, "on mild weather forecasts and bearish technicals," said analysts at Enerfax Daily.

"Natural gas prices have fallen very sharply on both sides of the Atlantic. Over the past week, the January Henry Hub[, La.,] futures contract lost 19.9% of its value in falling by $2.84/MMbtu to expire at $11.431/MMbtu," Horsnell reported.

In London, the February contract for North Sea Brent increased by 43¢ to $58.07/bbl on the International Petroleum Exchange. Gas oil for January gained $6.25 to $506.50/tonne.